Corporate reform in Vietnam is slow going

As Vietnam marks its 10th anniversary as a member of the World Trade
Organization in January, the one-party state has finally begun showing progress
on promises to make the country's state-run enterprises more compliant with
market principles and less dependent on government largesse.

There are plenty of investment opportunities in Vietnam's rapidly growing
market. The government in September announced plans to divest its entire
interest in Vietnam Dairy Products, or Vinamilk, Saigon Beer Alcohol Beverage,
Tien Phong Plastic, Bao Minh Insurance and eight other state-backed companies
by the end of 2017. Authorities began by floating Saigon Beer also known
as Sabeco on the Ho Chi Minh Stock Exchange on Dec. 6.

Against the opportunities, however, investors must weigh the endemic
corruption that plagues business in Vietnam and red tape that strangles
potentially profitable deals and hinders the country's development.

In the money Fraser and Neave, the Singaporean drink maker owned by Thai
Beverage on Dec. 13 bought 5.4% of Vinamilk, lifting its total stake in the
company to 16%.

Hanoi also registered Vietnam Airlines and Vietnam National Textile and
Garment Group, or Vinatex, as unlisted public companies on Jan. 3, allowing
investors access to shares.

"I believe in the future there will be increasing interest from
international investors to invest in large Vietnamese companies," said Daryl
Liew, senior portfolio manager at Reyl Singapore.

Vietnam has two stock exchanges the Hanoi Stock Exchange and the Ho Chi
Minh Stock Exchange and they are expected to merge, possibly this year.
In an effort to smoothly combine the two, Vietnam launched a new share index in
October called the VNX Allshare, which comprises issues from both
exchanges.

State-run enterprises are cash cows for the government. Dividends are its
second-biggest source of revenue, after taxes. Vinamilk alone reportedly
generates roughly $86 million a year in payments. State companies often employ
former government bureaucrats in top positions and provide platforms for shady
deals.

Prime Minister Nguyen Xuan Phuc is trying to tackle these problems by
cracking down on executives at state-run companies as part of a broader
anti-corruption campaign. The government has targeted more than 100 current and
former businesspeople, including Trinh Xuan Thanh, the onetime chairman of
PetroVietnam Construction. Thanh left Vietnam in July, ostensibly on vacation,
but has not returned. Dozens more suspects appear to have fled the country.

The prime minister is going after Thanh to hold him accountable for massive
losses at PetroVietnam. But there is also speculation the ex-chairman is
suspected of bribing his way into a government post.

Combating corporate malfeasance is not the only reason Hanoi is selling off
assets. The government is also trying to raise money for infrastructure
spending using its own resources, along with official development assistance
and other international lending vehicles. Vietnam's public debt in 2016 was
equivalent to 65% of gross domestic product, up from 50% in 2010 and 41% in
2005.

Tax revenue is eroding, with receipts from the petroleum sector plunging 42%
on the year for the first 10 months of 2016. New free trade agreements,
particularly Vietnam's membership in the Association of Southeast Asian Nations
Economic Community, shrank tariff revenue by 4.3% on the year over the same
period.

Rules are for bending, December 2016 also marks 30 years since Vietnam
enacted its Doi Moi economic reforms, which allowed foreign capital into the
country. Although opacity and corruption at state-run companies are the biggest
obstacles to economic progress, there are many others that are less visible and
make it difficult for global companies to do business in Vietnam.

"If you want to expand in Vietnam, you first have to pass their economic
needs test," said a 48-year-old executive at a Japanese retailer looking to set
up shop in Vietnam. The tests are designed to protect small and midsize stores,
which make up 90% of the domestic retail market. If a foreign investor seeks to
build more than one outlet, local authorities determine how that would affect
domestic competitors.

Regulations governing the retail sector are vague, and the companies subject
to them say the conclusions drawn by those who enforce them are arbitrary. The
government claims regulations were eased last year but offers no specifics.

Convenience stores have mushroomed recently in Ho Chi Minh City, which lends
support to the government's position, but VinMart+, run by local property
developer Vingroup, appears to have benefited most. VinMart+ is Vietnam's
largest convenience store chain by far, with over 900 locations. U.S.-based
Circle K ranks second with just 170 stores. Japan's Seven-Eleven will enter the
market, possibly this year. Foreign players will have to deal with these
restrictions to succeed in Vietnam.

Other vague rules plague business, including those governing customs,
transportation and permitting. A Vietnamese person working in media in the
central city of Danang said the government purposely leaves the rules unclear.
This gives officials a great deal of discretion and opens the door to
bribery.